Declining Prices: Good News for State Policy?

In a recession the demand for goods and services drops, putting downward pressure on prices.   One measure of how severe this recession has been is that the annual Consumer Price Index (CPI) may actually decline in 2009.  The last time this measure of consumer inflation dropped was in 1956.  This sounds like good news to the average consumer, but there are important state policy questions raised by a declining CPI.  Many policy decisions (including state education funding) are linked to consumer price changes. 

The chart shows the history of the change in the CPI in the post World War II period.  The last bar for 2009 is an estimate, based on forecast from Economy.com, the Congressional Budget Office and the Philadelphia

survey of Economists.  Falling energy prices are the biggest reason for the decline in the CPI, but home prices and vehicle prices are also lower this year.

 

While lower, and even declining, prices may sound like good news, not everyone will be pleased.  For example, many labor agreements, social security payments, and other contracts are tied to the CPI.  In New Hampshire escalation in the Regional Greenhouse Gas Initiative, the Judicial Retirement Plan, the Insurance Department Administration Fund, chartered schools and the Northeast Dairy Compact are tied to changes in the CPI.  Municipal spending caps in some communities use a combination of the CPI and population change.

Comments

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This decline in prices will be great news for consumers like labors and other lower class people but not foe states and governments should immediately work on this other wise bigger problems can be emerged from recession. Thanks for sharing this very important issue!

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The last bar for 2009 is an estimate, based on forecast from Economy.com, the Congressional Budget Office and the Philadelphia